The Reserve Bank of Australia (RBA) has continued the rate freeze at 4.10 per cent for the fourth consecutive month.
Interest rates have increased by 4 percentage points since May last year, with newly appointed RBA governor Michele Bullock saying the higher interest rates are working to establish a more sustainable balance between supply and demand in the economy.
“In light of this and the uncertainty surrounding the economic outlook, the board again decided to hold interest rates steady this month,” Bullock said. “This will provide further time to assess the impact of the increase in interest rates to date and the economic outlook.”
Speaking on the outlook, Bullock listed a variety of “significant uncertainties” that could shift monetary policy ahead.
“Services price inflation has been surprisingly persistent overseas and the same could occur in Australia,” Bullock said. “There are also uncertainties regarding the lags in the effect of monetary policy and how firms’ pricing decisions and wages respond to the slower growth in the economy at a time when the labour market remains tight.
“The outlook for household consumption also remains uncertain, with many households experiencing a painful squeeze on their finances, while some are benefiting from rising housing prices, substantial savings buffers and higher interest income.
“And globally, there remains a high level of uncertainty around the outlook for the Chinese economy due to ongoing stresses in the property market.”
Bullock said some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, “but that will continue to depend upon the data and the evolving assessment of risks.”
The RBA confirmed that inflation in Australia has passed its peak, but noted it is still too high and will remain so for some time yet.
“Timely indicators on inflation suggest that goods price inflation has eased further, but the prices of many services are continuing to rise briskly and fuel prices have risen noticeably of late,” Bullock continued. “Rent inflation also remains elevated.
“The central forecast is for CPI [consumer price index] inflation to continue to decline and to be back within the 2–3 per cent target range in late 2025.”
According to the Australian Bureau of Statistics (ABS), Australia’s monthly CPI grew to 5.2% in the 12 months to August 2023.
ABS head of prices statistics Michelle Marquardt said August’s annual increase of 5.2 per cent is up from 4.9 per cent in July. “Annual inflation remains below the peak of 8.4 per cent in December 2022.”
Meanwhile, Bullock said growth in the Australian economy was a little stronger than expected over the first half of 2023.
“But the economy is still experiencing a period of below-trend growth and this is expected to continue for a while.
“High inflation is weighing on people’s real incomes and household consumption growth is weak, as is dwelling investment. Notwithstanding this, conditions in the labour market remain tight, although they have eased a little.
“Given that the economy and employment are forecast to grow below trend, the unemployment rate is expected to rise gradually to around 4½ per cent late next year.
“Wages growth has picked up over the past year but is still consistent with the inflation target, provided that productivity growth picks up.”
Bullock said recent data are consistent with inflation returning to the 2-3 per cent target range over the forecast period alongside growth in output and employment.
Retailers welcome fourth cash rate pause
Both the Australian Retailers Association (ARA) and the National Retail Association (NRA) have welcomed the cash rate freeze, calling it a win for retailers as Christmas rushes in.
NRA CEO Greg Griffith said the RBA’s decision is a nod to business owners and their customers in the leadup to the most important retail trading period of the year.
“Pausing interest rates this month will allow consumers to spend more freely during the November/December sales period and allow retailers to better assess their employment needs for this period,” Griffith said.
“Almost 43 per cent of small businesses aren’t breaking even, and with more Australians being pushed into financial hardship, retail season is a make-or-break period for struggling retailers.”
The NRA noted it is hoping monetary policy will be eased in the new year so retailers can enjoy their well-earned profits from the sales period.
“This in turn should flow through to retail businesses and the pockets of their employees at a crucial time of the business calendar,” Griffith said.
“We congratulate new Governor Michele Bullock on her positive start to the role and urge her to continue to consider the impact of future rate pain when guiding the RBA on rate decisions.”
Meanwhile, ARA CEO Paul Zahra said the fourth rate pause gives the retail industry cautious optimism for Christmas.
“At a time of immense financial pressure and hardship for some– avoiding another cash rate increase will have a positive impact on spending and retail preparations,” Zahra said.
“Christmas and the holiday season are when discretionary retailers make up to two-thirds of their profits and hence, retailers need confidence to be able to invest in jobs during this time.
“The decision to pause interest rates will help bolster business confidence and again provides cautious optimism that they may have peaked.”
However, Zahra said the retail industry – particularly small business – is still reeling after 12 interest rate hikes between May 2022 and June 2023.
“Continued interest rate hikes have the dual effect of reducing customer spending whilst also increasing business costs – during a time where the industry is already under enormous pressure,” Zahra said.
Zahra said consecutive months of retail trade data have demonstrated that discretionary spending has significantly slowed.
“With the exception of food spending mainly driven by unavoidable price increases, all other categories of retail are either in decline or trending towards decline.”